IMF outlook positive, but negative factors loom

The world’s economy continues to show growth and momentum, but several negative factors could still have a negative impact. Economic analysis from global trade credit insurer Euler Hermes says a more evident slowdown may be seen throughout the remainder of 2006 and into 2007.

The International Monetary Fund (IMF) recently issued a positive outlook for the global economy, with rapid GDP growth of 4.9% for 2007 forecast ’ the fifth consecutive year of growth. According to the latest Euler Hermes Country Risk Bulletin, Hurricane Katrina boosted growth in the US as the nation’s economy appeared to be slowing. Meanwhile, Europe and Japan remain relatively strong economically. Moreover, emerging markets ’ particularly in Asia ’ are providing strong positive momentum.

“Indeed, emerging markets now account for more than 50% of world output,’ said Euler Hermes ACI Chief Economist Dan North. “The IMF believes this more balanced structure could support high growth for another decade. However, expect global imbalances, housing market bubbles and rapid consumer debt to pose continuing threats to this rosy scenario.’

According to the latest Euler Hermes Economic Outlook, the world economy seems to have hit the top of the business cycle in 2004, when the United States returned to the strong growth rates seen at the end of the 1990s and Japan emerged from stagnation. Europe continued to lag behind in this recovery phase, but US domestic demand was strong enough to boost exports from the emerging economies, with China leading the field. The turning point in the world economy came in 2005. The US economy is now slowing, Japanese growth has stopped accelerating, and the revival in Europe is too modest to counterbalance this.

World economic slowdown should be more evident starting from the second half of 2006. The rise in US interest rates should in the end have an impact on American consumption, which is now financed by a negative rate of savings. In Europe, the value added tax (VAT) rise in Germany at the start of 2007 will reduce domestic consumption and exports from its European neighbors. In Asia, the deceleration in world trade will slow those economies that remain overly dependent on external demand. The financial markets suddenly became aware of this risk of slowdown last May, leading to a fall in price on European and Asian stock markets, and an inversion of interest rate curves in the United States, with long-term rates falling below short-term rates.

While these factors are signs of recessionary expectations, Euler Hermes does not take such a pessimistic view of the global economy. “In our view, the world economy should achieve a soft landing ’ notwithstanding the growth of trade imbalances ’ thanks to the moderation of inflation, which will again add a little purchasing power to consumers all across the globe,’ said Euler Hermes Director of Research Philippe Brossard.

Euler Hermes ACI is the US subsidiary of the Euler Hermes group ’ the worldwide leader in trade credit insurance and risk mitigation solutions ’ and North America’s oldest and largest trade credit insurer. Publications such as the Country Risk Bulletin and Economic Outlook are produced on a regular basis and are available by request. For more information about Euler Hermes ACI and its products and services, visit